Examples for WACC - the firm’s beta or cost of debt can...

Example 1: WACC, with cost of debt before and after tax: Take a firm that has a before-tax cost of debt of 6%, and has a debt to equity ratio of 1/3. The firm’s equity has a correlation of .5 with the market, a standard deviation of 32, and the market’s variance is 400. The risk free rate is 4%, and the market risk premium is 10%. The tax rate is 40%. What is the firm’s after-tax WACC? What if the 6% cost of debt was given to you after-tax? Question: If a project has a standard deviation of expected cash flows of 40, does not change

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Unformatted text preview: the firm’s beta or cost of debt, can we use the WACC to discount the project’s cash flows? Example 2: New WACC if leverage changes. Your firm has a current cost of debt of 5% before tax. Your firm’s current equity beta is 1.2. The market return is 9%, and the risk free rate is 3%. You current leverage is 20% of firm value. If you change your leverage to 40% by raising new debt capital, which will not change your debt beta of 0.4, what is your new WACC (tax rate is 40%)?...
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